Following the Amazon/Whole Foods Takeover, is Kroger ($KR) a Buy?

We all know that Jeff Bezos’s Amazon gobbled up Whole Foods earlier this month. This introduces interesting questions about the Whole Foods brand…and we’re not going to deal with any of them! What we want to determine is whether or not groceries (and Kroger in particular) are a good investment on this side of the buyout, as well as following the 20% stock value drop of in early June. Let’s get right into it.

Along with retail, grocery is an industry undergoing some major changes. Fortunately, I don’t think any of these are going to adversely affect Kroger in the near future. Here’s why.

Kroger is Not a Direct Competitor to Whole Foods. Whole Foods is an elite grocery store. Wealth and privilege have become engrained in its brand image, and not to its benefit. Kroger is a competitor with other chains like Giant, Safeway, or Harris Teeter. Of these, many shoppers report being most pleased with Kroger in terms of cleanliness, quality, and service.

Kroger is Old and Valuable. Kroger’s no joke. They’ve been a grocery giant for decades, and in that time they’ve eliminated most debt and acquired some interesting technologies (digital couponing, in-store foot traffic tracking systems/algorithms, interactive shelving). Kroger also manufactures many of its own products. Whole Foods, even if it proves revolutionary in the hands of Bezos, has a long way to go in this respect.

Kroger Has Way More Market Share. Kroger has more than 2,700 locations. Whole Foods has just over 400.

Kroger’s Financials Are Solid. Kroger’s forward P/E is just 11.34%. Annual dividends per share are a steady 2.20%. Earnings were very slightly down last quarter (hence a recent 20% drop in $KR), but in general are incredibly reliable.

Kroger is Experimenting With the Same Methods Amazon/Whole Foods Is. Amazon isn’t the only company looking at online, automated, and delivery groceries. Kroger already offers online sales/delivery, and seems to be investing more deeply in this area.

People Like Shopping at Grocery Stores. Grocery is different from retail. While I can always find a pair of sneakers cheaper online than in store, I can’t necessarily get better lettuce this way. People like to go to stores, pick through the goods on display, and choose the ones they like best. They like making spontaneous purchases. Online/Delivery will one day alter this space, but don’t look for big changes anytime soon.

What is Amazon Gonna Do With Whole Foods Anyway? Grocery is not retail, and just because Amazon has been THE disruptor in retail doesn’t mean they’ll do it in grocery, at least not very quickly. What’s more, investors don’t have a sense, yet, about what is to become of Whole Foods. Will they just make the prices cheaper? Will it become more of a grocery technology brand? No one knows, so in the meantime, Kroger should be just fine.

Following Kroger’s 20% stock price loss after a not-very-bad quarter, I think they’re a buy. It’s not a bet against Amazon/Whole Foods, it’s a trust that Kroger is a different kind of company with solid fundamentals and a good future. In the long term, Bezos could accomplish the disruption of this industry just like he did with retail. But for now, Kroger’s likely to gain back all the value they lost, and then some.